Remuneration is a sensitive issue in any industry but, with signs of strain appearing in the SME medical insurance market, insurers and advisers are looking to safeguard their futures by speaking out about commission levels.
The first signs of strain started appearing last year when Cigna stopped offering terms to intermediaries for SME business. Further evidence of problems came this year, with National Friendly pulling out of the market followed by Simplyhealth’s acquisition of Groupama’s UK healthcare business in August.
“It is worrying,” says Mike Izzard, managing director of Premier Choice Group. “We need to take a step back and look at the long term sustainability of the market rather than at our pay cheques. By moving to a more sustainable commission model, there will be some pain but this is better than destroying the market.”
Insurers are also aware that change needs to occur, as witnessed by PruHealth’s announcement earlier this year that it would only offer level commission. Dave Priestley, sales director at PruHealth, explains: “The SME market is very competitive and it becomes increasingly difficult to compete when any margin is eroded by high rates of initial commission. Chasing initial commission squeezes out all the margin for insurers and brokers. We want to create long-term partnerships with advisers and their clients and by adopting a level commission model we’re able to deliver value in a more sustainable and transparent way.”
PruHealth isn’t the only insurer to offer level commission. Bupa has been remunerating advisers in this way for several years and other insurers will offer level commission as one of their remuneration options.
The SME market is very competitive and it becomes increasingly difficult to compete when any margin is eroded by high rates of initial commission
However, Priestley admits that the decision to become a level commission only insurer wasn’t without its risks. “There is a worry that by setting commission at this level in a market where higher rates are possible, it means we don’t attract new business. On the positive side, we’re getting a lot of support from brokers who are saying it’s the right thing to do,” he adds.
Certainly, the majority of brokers are in favour of level commission. Izzard says it is ’a good thing that helps to stop churning’ and Glen Smith, managing director of Healthcare Partners, describes himself as an advocate of level commission. “Why wouldn’t you be?” he says. “There are companies that will churn business to get additional initial commission and level commission will help to stop this practice.”
Smith also appreciates that constantly switching a scheme can be bad news financially for an insurer. “Insurers have to make a profit,” he explains. “If they have a scheme that is borderline in terms of profitability then they want to hang on to it so it becomes profitable. If it switches to another insurer they’ve made a loss and so will the new insurer. The lack of transparency around claims histories exacerbates this problem.”
While Priestley admits some nervousness about the move to level commission, Bupa’s experience suggests PruHealth has made the right decision. “Commission policy should allow clients to make decisions about their healthcare needs based on the quality of advice they receive from the broker, the reputation of the provider and the quality of the product they are purchasing,” says Linda Wallace, head of intermediary management at Bupa Health and Wellbeing. “Level commission is in the best interests of our customers. We don’t believe it’s of any benefit to employees if their organisation regularly changes their healthcare provider as this does not provide continuity of care.”
The shift to level commission doesn’t suit everyone though. While no adviser will admit they chase the higher levels of initial commission, some perfectly valid business models do rely on the higher initial commission levels for financing. For instance, Smith says that when he started his business the extra injection of income was needed to cover set-up and business acquisition costs. “We’ve been trading for 15 years now and in the first few years we needed the higher initial commission to support our business costs. Cash flow would have been difficult with level commission,” he explains.
If the market continues to support high upfront commission we’ll see more insurers forced out of the SME market. We can’t afford to see other insurers leave the market. It will significantly reduce choice and competition
This is an argument that Priestley encountered as PruHealth repositioned its remuneration package. “Some advisers have built business models where they need the higher initial commission to cover the costs of acquiring new business. It’s an expensive model but, given the state of the market, you do also have to question whether it’s genuinely new business or switch business,” he says.
Additionally, while there can be higher costs involved when attracting new business, many advisers say the regulatory environment means there’s usually very little difference between the cost of acquiring and renewing business. And even where there is more investment involved in acquiring business this doesn’t justify commission levels of as much as 25 per cent initial and as little as 5 per cent renewal.
Izzard says that advisers need to be prepared for a change as, whatever the business model, the market cannot afford to maintain the current commission practices. “It will hurt for a year or so if the market moves to level commission but it’s better to have a smaller cut of something than a larger cut of nothing, which might be what we end up with if we don’t make the change now,” he says.
He does feel there is some room for manoeuvre on the rates of commission, suggesting rates of 12 per cent initial and 10 per cent renewal to acknowledge that acquiring business can be more expensive than renewing it.
While PruHealth’s move is brave and has helped to raise the level commission debate, encouraging other insurers to move to a level commission only basis is essential to drive real change and improve the sustainability of the market. “If the market continues to support high upfront commission we’ll see more insurers forced out of the SME market,” says Priestley. “We can’t afford to see other insurers leave the market. It will significantly reduce choice and competition.”
But there’s less appetite for a move to level commission than many would like to see. As an example, Nick Reynolds, head of intermediary sales at Aviva UK Health, says that while he can appreciate the benefits to the market of only offering level commission he doesn’t believe advisers are ready for it yet. “The mature intermediary firms welcome level commission but there are still plenty of firms with hungry acquisition models that favour higher levels of initial commission,” he says. “We also find that a lot of advisers want level commission rates applied to their back books too, which is effectively an uplift.”
While Aviva may not be about to follow PruHealth and Bupa, there are some encouraging signs. Reynolds says he is seeing a lot of interest in level commission from advisers who are setting up panel arrangements with insurers. Customers are offered cover from a smaller selection of insurers but if they want a whole of market review this costs extra, which helps to demonstrate the value of advice.
“We do expect to see a gradual shift to level commission and we do already have a reasonable number of level commission deals in place but I expect it’ll take three or four years before it becomes the main form of remuneration for advisers,” adds Reynolds. “It can’t be brought in overnight.”
And, while a move to level commission will help to inject some sustainability into the market, other initiatives will be necessary to support this.
Smith would like to see some movement on tax breaks. “It doesn’t make sense that medical insurance is a benefit in kind. Why should employees be taxed on this when it’s increasingly put in place to help employers reduce absence?” he explains.
As well as pushing for tax incentives from the government, insurers are looking at fairer ways to price schemes. For instance, Aviva introduced a new renewal pricing approach in August 2010 to spread the effect of increased claims costs. “Rather than just having a loss ratio for the scheme we also look at member loss ratios and factor these into the price to make it a fairer reflection of what we expect future claims costs to be,” says Reynolds. “We’re also doing a lot of research among employers to see what they do want.”
Some insurers are also questioning product design. Priestley says that fundamentally the product hasn’t really changed over the years but, with premiums increasing significantly each year, it’s essential to demonstrate value. “A genuinely different product could create an environment that attracts new customers. If we stick with what we’ve got, at some point employers will start to question the value of their medical insurance and some may cancel,” he adds.
Among the suggestions on product design that will drive more sustainability in the market are targeted products that would focus on treating conditions that reduced productivity, as well as a greater adoption of shared risk, which helps to deter claims by spreading the cost between the employee and the insurer. “PruHealth’s announcement is beneficial to the market but we need to keep pushing. It would be great to see one of the big insurers banging the drum for the industry,” says Smith. “It’s a tough market but we shouldn’t give up.”